Thursdays sharp fall is attributed mainly to global factorsthe worldwide fall in equity, currency and commodity markets, mainly metals. If Indian markets fell more sharply than their emerging market counter-parts and Eurpoean and American markets, then one must remember the run up in prices was also that much sharper. Foreign Institutional Investors (FIIs) are believed to have led the selling in cash and derivative trading, in which both notched up heavy trading volumes. But FII sales, especially by hedge funds operating through Participatory Notes (PNs), was also not a surprise. Most leading foreign brokerage and research houses have openly said that the Indian market was over-heated at a Sensex of 12,000 plus and needed a correction.
There is, however, a serious issue over the lack of clarity on the taxes payable by FIIs as well as domestic investors. The finance minister has already clarified that the latest draft circular of the Central Board of Direct Taxes, spelling out 15 criteria to be used by assessing officers to determine whether FII income is business or investment income, is nothing new. But the clarification came too late in the day perhaps to stem the slide.
The forced unwinding of leveraged trading positions had exacerbated the fall in the last hour of trading, but sources say that it has not yet touched High Networth Individuals (HNIs) who usually form part of broker-managed private equity groups. In the coming days, prices may drift even lower as these investors are forced to unwind their trades. Despite the size of the fall on Thursday, it still does not appear as though this is anything but a correction. In fact, it may bring some much-needed sanity in the real-estate market as well as the wild fund-raising plans of greedy industrialists and the pricing of their Initial Public Offerings. For the moment, we will have to wait and watch.